Last week I conducted a training session for our team, teaching them how to create a personalised plan for themselves and invest for their retirement portfolio. I emphasised the primary concepts of creating a portfolio, regular savings, and dollar cost averaging, using simplified examples from our business of managing money for high-net worth individuals with more complex situations.  The experience taught me that the majority of people do not need a financial advisor once they have a good financial plan.

In the past investing was the purvey of stockbrokers and bankers, but recently has moved away from transactional business towards fee-based asset management models.

As I wrote in my November 2021 article, a true wealth manager should evolve from peddlers of stock picks and structured products to real financial advisors: crafting a proper asset allocation, ensuring that a good financial plan is in place and family needs are taken care of, especially when recessions happen.

I‘ll go further and say that for just creating and managing a liquid portfolio of securities, which is what most financial advisors are primarily used for, you don’t even need them. This task has become less complex with the advent of exchange traded funds (ETFs), where anyone can replicate an index at minimal cost.  Teaching my team about personal investments showed me that a financial plan can be easily explained, personalised, and crafted within an hour. The difference between success and failure is determined by whether the investor can stick to the plan despite the emotional roller-coaster that comes with the ups and down of markets.

First, equity investments are the best creator of wealth over the long run. Better than real estate, and definitely better than bonds or cash.  Second, ETFs eliminate the risk of picking the wrong stocks and suffering permanent loss of capital, while enabling you to get the only free lunch in investing: maximum diversification. Third and most important, market timing is a money losing endeavour for the average investor, so they should stop worrying whether we’re on the cusp of a recession and whether stocks will be lower over the next six months .  Most investors will have thirty years or more of investing life ahead . In contributing a set amount every year to your portfolio, the difference between perfect market timing (buying at the bottom every year) and worst market timing (buying at the high point every year) is miniscule over a three-decade investing lifetime, computing at a difference of less than 1% annual returns. Coincidentally this is what you’d pay a financial advisor to do it for you. 

The biggest determinant of your total return is whether you stayed invested, or whether you unsuccessfully tried to time your entry points and ended up sitting in cash when markets were moving up.

To convince you further on the detriments of trying to time markets, watch the video “What If You Only Invested at Market Peaks?” on YouTube.  It illustrates the journey of Bob, an investor who saved every year and only invested when he was comfortable with stocks. Unfortunately, he only felt this level of comfort after a strong bull market and ended up always investing his savings at the absolute peak, just before a major bear market. 

While waiting to put his additional savings in the stock market, he kept all the cash in his current account at 0% interest. He bought an index fund every time. His financial plan was simple, save $2,000 a year and increase it by $2,000 every decade as his career progressed and only buy an ETF, a simple financial plan and an easy savings target to achieve for any investor.  

He started in 1977, planning to retire in 2019. He only made his first purchase at the end of 1980 after a 60% bull run. Over the next year and a half the market lost almost a third of its value, causing Bob to step back and keep his future savings in cash until the next bull market peak in 1987, the day before the Black Monday crash.  Bob again lost a third of his portfolio, but this time in just one week. The next purchase was at the peak of the dot com boom in 1999, where he proceeded to lose half of his portfolio in the next two years. Despite his dismal market timing record, he made one final purchase, you guessed it, in 2007 at the market peak before the Great Financial Crisis of 2008, where he once again lost half of his portfolio the following year. 

Bob’s one saving grace is that he never sold during the downturns, and just simply held on to his index fund. How did he end up? With $1.1 million. This is the result of the worst possible market timing and not selling in the panic during recessions. If Bob instead had simply invested via regular dollar cost averaging, his end portfolio value would have increased to more than $2.5 million.  

If Bob’s example is going to be the worst outcome as long as an investor has a good financial plan and sticks to it, do you need a financial advisor?  A do-it-yourself approach will work for most investors after they’ve created a suitable plan, which will require the advice of a competent financial advisor.  Once you have such a plan, you may still need a financial advisor / wealth manager if:

• You find it difficult to control your emotions during bear markets and at the top of bull markets, and need a guide during these periods to keep you on track
• You want a wealth manager that can smoothen the ups and downs of investing, creating a portfolio with lower volatility and reduce downside risk during recessions
• Your personal situation is more complicated and requires more than managing an investment portfolio for retirement, such as family inheritance planning and integrating your liquid portfolio with all the other assets you own so that they support each other to optimise growth in your total net worth.